BRK.B

Warren Buffett's $56 Billion Silent Warning to Wall Street May Portend Trouble for Stocks

In 1973, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) held its first annual meeting in the cafeteria of one of its subsidiaries and drew a few dozen people. This past weekend, Omaha, Nebraska, was the destination for roughly 40,000 investors to attend Berkshire's annual shareholder meeting.

The insatiable lure for these investors is the chance to listen to investing great Warren Buffett speak for hours on end about his company, the U.S. economy, and the stock market. After all, the "Oracle of Omaha," as he's jovially known by the investing community, has delivered a nearly 4,900,000% aggregate return for his company's Class A shareholders (BRK.A) since becoming CEO in the mid-1960s, and practically doubled up the annualized total return, including dividends, of the benchmark S&P 500 over the same timeline.

While plenty of investing wisdom was bestowed on shareholders at Berkshire's annual shareholder meeting, it's the company's first-quarter operating results that really stole the show -- and have given optimists little to cheer about.

A pensive Warren Buffett surrounded by people at Berkshire Hathaway's annual shareholder meeting.

Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

Warren Buffett's short-term actions don't always mesh with his long-term investing ethos

Throughout his tenure as CEO of Berkshire Hathaway, the Oracle of Omaha has been crystal clear that he would "never bet against America." He and his team, which included the affably dubbed "Architect of Berkshire Hathaway," Charlie Munger, until his November passing, strongly believe in buying stakes in wonderful businesses at a fair price and simply allowing time to work its magic.

However, what Warren Buffett preaches in front of 40,000 people and what he and his top investment aides, Todd Combs and Ted Weschler, do over shorter timelines may not always mesh.

During the March-ended quarter, Berkshire's consolidated cash flow statement shows that $2.691 billion in equity purchases were overseen, along with (drum roll) $19.972 billion in equity security sales. This works out to $17.281 billion in net-selling activity during the first quarter.

But here's the kicker: This is the sixth consecutive quarter Buffett and his team have been net-sellers of equities.

Collectively, Warren Buffett and his top investing aides have overseen $56.09 billion in aggregate ne-equity sales since Oct. 1, 2022.

The Oracle of Omaha's $56 billion silent warning foreshadows potential trouble for Wall Street

Although Warren Buffett has consistently shied away from offering negative takes on the U.S. economy and/or stock market during his nearly six-decade tenure as CEO of Berkshire Hathaway, $56 billion of net-equity security sales over an 18-month stretch speaks volumes without the Oracle of Omaha having to say a word.

The culprit for this consistent net-selling activity looks to be a historically pricey stock market and the irrational behavior of some of its participants.

In Buffett's annual letter to shareholders that was released in February, he had this to say about the "casino-like behavior" he wants no part of:

Though the stock market is massively larger than it was in our early years, today's active participants are neither more emotionally stable nor better taught than I was in school. For whatever reasons, markets now exhibit far more casino-like behaviors than they did when I was young. The casino now resides in many homes and daily tempts the occupants.

At the end of the day, Warren Buffett and his team want a fair deal on a great business, and they aren't willing to waiver from this ideal. As the S&P 500's Shiller price-to-earnings (P/E) ratio shows, there simply aren't many good deals at the moment.

S&P 500 Shiller CAPE Ratio Chart

S&P 500 Shiller CAPE Ratio data by YCharts.

The Shiller P/E ratio, which is also known as the cyclical adjusted price-to-earnings ratio (CAPE ratio), is based on average inflation-adjusted earnings from the last 10 years. This differs from the traditional P/E ratio which only examines trailing-12-month earnings. The beauty of the Shiller P/E averaging earnings over a 10-year period is that it minimizes the impact of one-off events (e.g., the COVID-19 lockdowns).

As of the closing bell on May 3, the S&P 500's Shiller P/E stood at 34.05. This is nearly double its average reading of 17.11 when back-tested to 1871, and it's the third-highest reading during a bull market in over 150 years.

Perhaps the bigger concern is what's historically followed the five previous instances where the Shiller P/E ratio surpassed 30 during a bull market rally. Following all five prior instances, the S&P 500 or Dow Jones Industrial Average went on to lose between 20% and 89% of their respective value. Though the Shiller P/E ratio isn't a timing tool -- i.e., stocks can stay pricey for multiple quarters, if not years -- readings above 30 tend to be a precursor to big moves lower in the stock market.

The lack of desire by Buffett and his team to buy stocks during an 18-month stretch suggests they expect valuations to contract.

A professional stock trader using a stylus to interact with a rapidly rising stock chart displayed on a tablet.

Image source: Getty Images.

Being patient has been a winning formula for Warren Buffett and Berkshire's shareholders

To add fuel to the fire that Buffett and his top investing minds are in no rush to put their company's capital to work, Berkshire's cash pile, including Treasury bills reached a whopping $189 billion, as of March 31. During his company's annual shareholder meeting, Buffett also suggested it's probable that Berkshire's treasure chest surpasses $200 billion when the current quarter comes to a close.

Despite these crystal-clear signs that neither Buffett nor his team are seeing much in the way of value right now, there's no reason for long-term-minded investors, or Berkshire Hathaway's shareholders, to despair.

For starters, the Oracle of Omaha hasn't previously been afraid to use Berkshire's hearty cash pile during moments of economic turbulence to take advantage of unique opportunities. A perfect example being the $5 billion in preferred stock Berkshire acquired in Bank of America (NYSE: BAC) during the debt-ceiling crisis of 2011.

While BofA's preferred stock paid a 5% yield, it was the warrants for 700 million shares of Bank of America at an exercise price of $7.14 that proved invaluable. Berkshire's enormous treasure chest allowed it to capitalize on Bank of America's desire to shore up its cash position during a period of instability for big banks. Today, BofA is on firm financial footing and benefiting immensely from higher interest rates.

Buffett and his team also astutely understand that periods of growth for the U.S. economy last disproportionately longer than downturns. Whereas no U.S. recessions following World War II has surpassed 18 months in duration, most periods of growth last multiple years. In fact, two economic expansions since World War II topped the 10-year mark.

Berkshire's brightest minds have packed their company's investment portfolio with cyclical businesses that can take advantage of these long-winded periods of growth for the U.S. and global economy. Having a lot of cash at the ready simply allows Buffett and his aides to pile into time-tested businesses when these short-lived downturns materialize.

Though an 18-month streak of net-selling by Buffett may be disappointing in the short-term, history suggests being patient is a winning formula for the Oracle of Omaha and his company's shareholders.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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